What is a 3PL? Understanding third-party logistics companies
In This Article
You can purchase nearly anything online and have it delivered to your doorstep within days, hours, and even minutes. It’s an irresistibly seamless experience that has led to e-commerce outpacing overall retail sales growth every year over the past decade.
It’s also never been easier to create a brand, launch an online store, and sell to customers thanks to the emergence of readily available, inexpensive technology and marketing channels. However, despite this democratization of commerce, friction remains and largely lies at the end of the entire supply chain.
This is where e-commerce brands rely on outsourcing fulfillment to external parties commonly referred to as third-party logistics providers (3PLs) to manage the process of receiving, storing, and shipping customer orders. 3PLs, also known as fulfillment partners, have been around for a while, but only recently have become a household name.
3PL defined: the meaning behind the acronym
3PL providers are companies that offer outsourced logistics services to their clients. These services can encompass a broad range of operations including transportation, warehousing, packing, inventory management, and freight forwarding, among others.
The evolution of 3PLs
The history of 3PLs is closely tied to the evolution of supply chain management and logistics operations over the decades. The key developments in the history of 3PLs influence how 3PLs work today:
Pre-1980s: Early logistics services
Before the term 3PL was coined, logistics services were primarily conducted in-house by manufacturing and retail companies. External logistics providers existed, but their roles were limited to specific tasks like transportation and warehousing, without the integration and comprehensive service offerings seen today.
1980s: The birth of the 3PL service
The concept of third-party logistics emerged more clearly in the 1980s, particularly in the U.S., driven by the deregulation of the transportation industry. The Motor Carrier Act of 1980 significantly deregulated the trucking industry, leading to increased competition and lower shipping costs. This environment made it more feasible for companies to outsource fulfillment and logistics functions to specialized providers. Hence, more companies started to use a 3PL service provider.
1990s: Expansion and technological integration
The 1990s saw rapid growth in the 3PL industry, fueled by globalization and the rise of just-in-time manufacturing. Companies partnered with a 3PL to optimize their supply chains on a global scale, requiring more sophisticated logistics solutions. This period also witnessed the beginning of IT and technology integration into logistics services, enhancing efficiency, tracking, and communication between 3PL companies and brands.
Early 2000s: E-commerce and supply chain management
The rise of e-commerce in the late 1990s and early 2000s further transformed the 3PL industry. Online retail demanded more complex logistics solutions, including e-fulfillment centers, reverse logistics for returns, and faster delivery times. 3PLs began to offer more specialized services to meet these needs and integrated advanced technologies such as warehouse management systems (WMS) and transportation management systems (TMS).
2010s to present: E-commerce becomes ubiquitous
The growth of e-commerce over the past decade has led to an explosion of growth in the fulfillment center market. It started with modern e-commerce brands working with traditional 3PLs to help store their products (warehousing) and ship them to customers (fulfillment). Traditional 3PLs were happy to have the business, but had to adjust their operations given standardization was no longer possible.
E-commerce products of various shapes and sizes needed to be stored, and when ordered, placed into the smallest box or envelope possible and shipped to individuals located across the globe at impossible-to-predict intervals—in other words, a significant amount of variance.
Adjusting to this new reality was a challenge for traditional 3PLs and created an opportunity for a new wave of 3PLs to emerge that focused entirely on the needs of e-commerce brands.
How third-party logistics work: From warehouse to order fulfillment
While warehouses perform several functions (and will typically say yes to just about anything), let’s take a look at the 3PL fulfillment processes and how a 3PL can help support e-commerce brands that sell through online and other retail channels.
Inbound receiving
The first step is getting inventory into the warehouse. This function is referred to as inbound receiving and is the process followed by a 3PL once inventory shows up at the warehouse. The brand is typically responsible for getting the product to the door of the 3PL warehouse. The 3PL will assign labor to unload the product from the truck and “stage” it on the warehouse floor for receiving.
Receiving can be done in many ways. In general, a Purchase Order (“PO”) that details products purchased from the manufacturer is included in the delivery and provided to the 3PL by the brand. The 3PL then matches what was received to what was ordered (shown on the PO) and enters it into their system.
The brand typically focuses on two metrics: time and accuracy. The 3PL must receive the inventory for it to be available to ship. The faster this receiving process, the faster the product can be shipped to customers. Opposing that is accuracy. If the wrong item or quantity is received (and subsequently entered into the warehouse system), the result is overselling or shipping the wrong product to the customer. There is no single solution, however, a combination of process controls and sampling can help reduce the likelihood of this happening.
Storage
Once inventory is received, it is typically moved to storage within the warehouse locations. Storage locations come in all shapes and sizes and depend on available warehouse space and the product being stored. 3PLs take different approaches to storing products, some by category or size, others randomly. Each business and product is different so the right choice will greatly depend on the variables involved. The 3PL needs to be able to quickly and accurately locate and retrieve inventory when a customer places an order.
Pick, pack, ship
Once inventory is in the warehouse and stored in an accessible location, it’s considered available for sale. The heart of the 3PL operation is their ability to “pick, pack, and ship” orders quickly (typically within 24 hours of the order being placed) and accurately (typically at a rate of at least 99%).
Here’s an oversimplified fulfillment process:
The 3PL receives the customer's order
Items are picked from their storage location and brought to a “pack” station
The item is placed in a shipping container (envelope or box)
A shipping label is printed and placed on the exterior of the shipping container
The selected shipping carrier (i.e. UPS, DHL, USPS) collects the box at a pre-scheduled time and delivers it to the customer based on the shipping service selected
The goal is speed and accuracy, and both should be measured and tracked against targets that are mutually agreed upon between the brand and the 3PL. These are often referred to as Service Level Agreements or SLAs. It’s important to note that 100% accuracy is not realistic given the number of variables involved, starting with how the manufacturer labels the product initially, and the propensity for human error.
Inventory management
The best way to ensure orders are accurately fulfilled is effective inventory management. This involves double-checking the inventory levels the warehouse system reports for the various storage locations and making adjustments when errors are found. For example, the system might say there are five items in location #ABC but only three were counted.
There are generally two approaches to doing this:
Periodic: All inventory is counted on a predetermined date
Perpetual: A sample of inventory is counted daily/weekly/monthly
Each approach should be documented by the 3PL and compared to mutually agreed-upon goals established ahead of time.
Once you are comfortable with the inventory levels of the warehouse, the next challenge becomes properly reflecting those numbers throughout your sales channels. This is typically done through an API connection between your internal order management platform and the warehouse management software that the 3PL uses. It’s important to understand the technological capabilities (and limitations) of the 3PL partner before deciding the strategy that makes sense for your brand.
Returns processing
If a customer decides to return a product, typically he or she will send it back to the 3PL which performs various services that fall under the returns processing umbrella. This is a function that is highly dependent on the brand's return policy and how salvageable the product they sell is.
At a high level, the 3PL will unpack the customer return, verify that the item matches the return merchandise authorization (RMA), and dispose (inspect) the product for sellability. Often, brands will work with a 3PL to develop a product refurbishment process that attempts to make the returned product sellable to future customers. If the product is deemed unsellable, then it is considered “damaged” and typically donated or liquidated in some other way by the 3PL.
The key metrics to track for returns processing are the time it takes from when the 3PL receives the returned item to when the product has been disposed of, and the rate at which returned products are returned to inventory (deemed sellable) vs considered damaged by the 3PL.
Conclusion
When brands choose to work with a 3PL, understanding both their evolution and their processes are helpful to develop empathy for them. This will in turn empower brands to spot where they can make a positive impact and form a more effective partnership with this key partner as a smooth supply chain not only boosts a brand’s bottom line, it also results in a positive customer experience.
